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Should Fed Worry About 99-Year Cycle?

CALL it the 99-year cycle. If it continues, then this year may not be an enjoyable one for investors.

William A. Draves, the co-author of "Nine Shift," a book looking at parallels between the first years of the 20th century and the first years of the 21st century, points out that the stock market over the last nine years resembles the market in the years beginning in 1898.

He suggests that in both periods the economy was dealing with the changes wrought by new technologies that would change the way business was done: the automobile in the early 20th century changed the economy from agrarian to industrial, and now the Internet is changing it from industrial to information.

A look at the Dow Jones industrial average from the end of 1897 shows that it rose nicely for three years, then had three down years, two years of recovery and one year when not much happened. At the end of the nine years, the Dow was up 91 percent for the period.

The closest comparison seems to be in the New York Stock Exchange composite index, which measures the performance of every stock on the Big Board. Since the end of 1996, the annual pattern has been similar to that of the Dow 99 years ago, and the index is up 87 percent.

A chart showing the performance of stocks in the two eras indicates the matches are not perfect, with the market showing a little less enthusiasm as the 19th century ended than it was to show 99 years later, and a little more enthusiasm in the rebound of 2003 and 2004 than it had evidenced nearly a century earlier.

There is, of course, no reason to think such a pattern is bound to continue. But if it does, this year will be a bad one. The Panic of 1907 caused banks to fail and provided evidence that the monetary policies of the United States were inadequate.

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When the Treasury was unable to put up enough money to calm scared depositors, J. P. Morgan did so, a fact that appalled those who deemed it risky and humiliating for the government to have to rely on an investment banker to prevent disaster. The reaction led, in 1913, to the establishment of the Federal Reserve System to avert future crises.

Today, faith in the Fed is high. The Fed's prompt action after the crash of 1987 and again after the technology bubble burst in 2001 are seen as proof that even if there is a housing bubble about to burst, there is little to fear in the broader economy.

But a look at The New York Times of 99 years ago shows that the government thought similar confidence was deserved by the system of the day, in which the Treasury withdrew money from banks when cash was plentiful and deposited it when seasonal demands for credit pushed interest rates to high levels.

"The Treasury has never come to the relief of stock gamblers and probably never will," proclaimed Treasury Secretary Leslie M. Shaw in a statement that was reported by The Times on Dec. 30, 1906. But, he explained, the Treasury had intervened to help business that was being hurt by high interest rates, and would continue to do so. He did not address what would happen if more cash was needed than the Treasury had available.

Mr. Shaw stepped down as Treasury secretary early in 1907, after holding the office for more than five years, longer than anyone had served in six decades. His successor's inadequate efforts were one reason the Dow ended 1907 with a loss of 38 percent.

Not, one might say, the most comforting historical precedent for Ben S. Bernanke, who will soon succeed the long-serving Alan Greenspan as chairman of the institution that, in no small part, owes its existence to the Panic of 1907.